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Rediff.com  » Business » RBI set to overhaul export receivable hedging norms

RBI set to overhaul export receivable hedging norms

By Anindita Dey & Nimesh Shah in Mumbai
May 06, 2004 09:52 IST
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The Reserve Bank of India is reworking the norms for hedging export receivables of companies which are not backed by actual invoice.

At present, an exporter is allowed to hedge only 50 per cent of export receivables not backed by actual invoice and this quantum is calculated on the basis of the average turnover over the last three years.

The Reserve Bank of India may change the base to a moving average of last year's turnover (or last four quarters), said banking sources close to the development.

In all likelihood, the RBI may also allow exporters to take a cover for entire proceeds of exports based on this moving average instead of the present practice of 50 per cent.

The whole objective of the exercise is to increase the amount of export proceeds not backed by actual invoice eligible for hedging.

Hedging is a strategy to protect earnings in foreign currency from exchange rate fluctuations in currency by fixing the value of the future proceeds at the present date.

The issue has cropped up as export turnover at most companies surged last year and the average of last three years' turnover did not reflect the true scenario as under this arrangement the amount eligible for hedging was much less.

Bankers pointed out that despite a continuous appreciation of the rupee vis-a-vis the dollar, export performance of most companies has been remarkable.

The need for taking a cover is significant at this juncture as other strategies to ensure higher income, usually done through cross currency billings, are losing sheen.

Most exporters last year had converted their billings to euro and pound sterling as these currencies were gaining to dollar. However , at present, dollar has been appreciating both to the euro and pound even when it is losing to rupee.

At present, one euro fetches $1.19 and one pound $1.77. Six months back, it used to be $ 1.14 per euro and $1.64 per pound sterling.

Therefore, income out of the export proceeds are taking a hit owing to exchange rate risk as rupee is appreciating to dollar but dollar, in turn, is appreciating to euro and pound. Last year, the dollar depreciated against all major currencies.

Therefore, instead of going for cross-currency strategies, exporters prefer to book forward for their entire proceeds to escape losses arising out of the currency risk, said a banker.

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Anindita Dey & Nimesh Shah in Mumbai
 

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